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- PERSONAL FINANCE NEWS
- CD NEWS
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KEY TAKEAWAYS
- After inflation began surging in 2021, the Federal Reserve fought back with a historic interest rate-hike campaign in 2022 and 2023—which in turn caused CD yields to skyrocket.
- Inflation has cooled a lot, but it's not yet as low as the central bank wants—so it's waiting and watching for the right time to begin lowering its federal funds rate.
- The consolation prize for savers is that the longer inflation stays above the Fed's target, the longer the Fed will keep the federal funds rate high—and the longer CD rates will stay elevated as well.
- Today's best CDs offer returns of 5% or more for terms of up to three years—including a top nationwide rate of 5.75% APY.
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How Inflation Affects CD Rates
One of the Federal Reserve's mandates is to manage inflation. And it does that by adjusting the federal funds rate. When inflation is too high, the central bank raises its benchmark rate and can lower it once inflation is back in check.
Though the Fed does not directly set savings and CD rates, the federal funds rate affects what banks and credit unions are willing to pay customers for their deposits. So when the Fed raises the fed funds rate, financial institutions generally raise their savings and certificate of deposit (CD) rates.
All of this played out in historic fashion in 2022 and 2023. Due to a post-pandemic inflation surge, the Federal Reserve embarked on an aggressive rate-hike campaign in March 2022 that raised the federal funds rate by a cumulative 5.25% by July 2023. That's the benchmark rate's highest level since 2001—and the Fed has held it there for more than seven months.
The Fed's rate hikes caused CD rates to also shoot up, rising to 20-year highs last fall. Though today's CD yields are a bit lower due to the Fed indicating it would no longer raise rates, CDs are still paying exceptionally high returns.
Inflation Has Cooled—But Not Yet Enough
The Fed has now entered a new stage: determining when inflation seems to be sufficiently—and sustainably—tamed so that the Fed can begin lowering the federal funds rate. It was hoped this would occur early this year and, in fact, Fed members meeting in December projected three rate cuts in 2024.
But inflation readings since then have not been cooperating. The Fed's favorite inflation measure, personal consumption expenditures (PCE), actually climbed in January, and though this doesn't necessarily mean the overall trajectory of inflation is rebounding, it's enough to give the Fed pause.
Indeed, while financial markets are still betting on more than one rate cut being implemented this year, doubts are starting to creep in about how long the Fed may need to hold rates where they are. When a Fed Board member was asked Friday whether rate cuts would still occur this year, he replied, "We'll see."
Today's Best CDs Still Pay Great Rates—But for How Long?
As you can see, where CD rates go for the rest of this year will depend largely on where the Fed sees inflation heading. If inflation continues to stubbornly persist, CD rates will likely plateau near their current levels. But if inflation subsides and the Fed feels comfortable implementing a rate cut, banks and credit unions would then begin lowering their CD rates as well.
Though not impossible, markets think the chance of the Fed needing to change course and raise rates is slim. Traders think the odds of maintaining or lowering the federal funds rates are significantly higher. As a result, CD rates will most likely stabilize or drop in 2024.
That makes now a good time to lock in one of today's stellar rates before they begin to fall. At the top of our daily ranking of the best nationwide CDs, you can earn 5.75% APY for a 6-month term. Or if you'd like to stretch it to a year or 18 months, you can snag rates in the mid-5% range.
If you're able to commit your money for longer than that, you could guarantee your rate far into the future—even after the Fed eventually begins lowering rates. For instance, locking in the top 3-year rate of 5.00% APY would mean you earn that annual percentage yield until 2027. Or you could grab a mid-4% rate that you can count on for four or five years.
Whatever CD horizon is best for your financial timeline, now is a good time to act. Though you may have some time to lock in a great rate if the Fed keeps its benchmark steady for several more months, rate predictions are always iffy—and there's a chance CD rates could drop before you make your move.
High-yield savings accounts also offer stellar returns right now. The leading nationally available savings account rate has been 5.50% APY since December and is likely to stay at or near that level until there's a strong sign the Fed is ready to begin reducing rates. Just remember that, unlike a CD, your rate on a savings account is variable, meaning the bank can lower it at any time and without warning.
How We Find the Best Savings and CD Rates
Every business day, Googlawi tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.